Burger King Deal Structure Still Has Sizzle (Law360)

By Liz Hoffman

In the two years since Kirkland & Ellis LLP attorneys used a novel deal structure to help a private equity consortium acquire Burger King Holdings Inc., the setup — which blends the speed of a tender offer with the certainty of a shareholder vote — has retained its sizzle, helping at least 17 more buyers find a smoother path to closing go-private deals.

The dual-track process lets buyers launch a tender offer, which is faster, and simultaneously lay the groundwork for a shareholder vote, which takes longer but guarantees 100 percent ownership. Sellers can return money to shareholders faster, buyers get the certainty of control and, especially in debt-heavy buyouts, can find lenders more willing to deal. Transactions can close in as little as six weeks.

Known in corporate circles as "the Burger King structure," it has been used to acquire defense contractors, craft stores and medical technology firms. The deals have ranged in size from $21 million to $3.2 billion and are roughly split between financial buyers and industry players, according to data from FactSet MergerMetrics.

Its latest success story is Centerbridge Partners LP's $1.2 billion acquisition of P.F. Chang's China Bistro Inc., which closed in just eight weeks this summer. Avista Capital Partners LP's dual-track takeover of Union Drilling Inc., announced last month, is pending.

"It's something that both sides actually like, and that's rare to find in high-level negotiations," says Cooley LLP mergers and acquisitions chairwoman Barbara Borden, who used a dual-track setup to help Forest Laboratories Inc. acquire Clinical Data Inc. last year. "It doesn't fit every deal, but for the ones it does, it's a great tool. It was perfect for us."

The structure was born out of tough negotiations in the summer of 2010 between Burger King and 3G Capital Management LLC, the Brazilian-backed private equity group seeking to buy it. The parties had been talking for weeks, but momentum had stalled by early August, according to public documents. Burger King's lead financial adviser, Morgan Stanley, floated using a tender offer to move things along.

3G was open to the idea and well-financed enough to do it. But it knew it needed least 79.1 percent of shares to close a short-form merger. Anything less than that would force a shareholder vote, which could have dragged the deal into the new year. Kirkland's Stephen Fraidin and William Sorabella, acting for 3G, saw an opening.

"Bill and I sat down and said, ‘maybe we can do this at the same time,'" Fraidin remembers.  "We didn't think it had been done before, but there was nothing that made us think it wouldn't work."

The pair hammered out a plan that would let 3G pursue a tender offer while also filing a proxy statement for a shareholder vote. If the tender threshold was met, the companies could pursue a short-form merger. If it wasn't, the wheels would already in be motion for a shareholder vote.

The backup ended up being unnecessary. 3G got more than enough shares in the tender offer, and the acquisition closed less than two months later. But in the process, a new deal prototype had been created — one that solves a tension inherent in takeovers: closing a deal quickly, but closing it tight.

"At the end of the day, what matters is closing the deal," said John Pollack of Schulte Roth & Zabel LLP. "[The shareholder vote] is kind of a security blanket. You hope you don't have to use it, but it's there and allows the deal to close faster if you need to use it."

When It Fits

Attorneys said the Burger King structure works best for deals with a high minimum tender offer thresholds — well above a simple majority. Companies with fewer shares to issue, nervous lenders or a ticking clock will want to get as close to 90 percent as possible with the tender offer and not have to rely on big top-up options, attorneys said.

"It's hard to move the needle in a top-up by more than a few percentage points," Borden said. "There are situations where you want to be in striking distance after the tender offer, and that's where a dual-track deal makes the most sense."

For example, Forest Labs wanted to use cash housed in an Irish subsidiary to buy Clinical Data. To maximize tax perks, the tender offer and closing had to happen in the same fiscal quarter. That time crunch landed Forest Labs with a high tender offer threshold of about 80 percent.

The deal structure can also help placate lenders — particularly important for private equity firms that load up acquisitions with debt. Because the target company stock serves as collateral on the loans, most banks are hesitant to lend against the full value of the shares when there's a chance that only, say, 70 percent will actually be there when the funds are drawn down, David Rosewater of Schulte Roth & Zabel LLP said.

"Most lenders aren't going to like not having 100 percent of the target company shares pledged up front," Rosewater said. "The terms you'll see are much better if you can show them that you'll have 100 percent of those shares at closing."

Deals facing a particularly tight time window might also want the certainty of a faster fallback option. Burger King, for example, wanted to get the deal done before year's end, when an expected hike on capital gains taxes would have dimmed the payday for its shareholders. Forest Labs was racing the quarterly calendar. Avoiding shareholder lawsuits, last-minute competing bids or a shift in the market all speed up the clock.

"Having your deal hang for another 30 days, that's another 30 days worth of risk," Pollack sad. "Buyers don't want the deal to linger any more than targets do."

When It Doesn't

The structure makes less sense for deals likely to draw a second look from regulators, attorneys said. Transactions in tightly regulated industries like banking or defense, or those that would combine major players in a concentrated industry — like the recent, heavily litigated tie-up of Express Scripts Inc. and Medco Health Solutions Inc. — won't save any time with the dual-track structure, Rosewater said.

"If there's a significant antitrust issue, the deal speed isn't going to happen anyway, so it makes more sense to go with the simple, one-step merger," Rosewater said.

Some strategic deals, especially those without big debt pieces or takeovers where the buyer is already a major shareholder probably don't need the extra security, especially if there's little competition from other buyers, other attorneys said.

The structure doesn't come cheaply, either, so smaller deals with smaller advisory budgets might pass. Though two deals under $100 million have used it, most have been above $400 million and one-third have cracked $1 billion.

"The extra expense becomes more meaningful for smaller companies and at that level, the stakes are a little lower," Rosewater said. "At some point, they may say, let's just go with the one-step merger."

Evolving Regulation

There is still some gray area in SEC regulations, attorneys said. Two lawyers who asked not to be named said the SEC is still evolving its position on when buyers can file preliminary and definitive proxy statements, two key steps in setting a dual-track deal in motion.

Both said the SEC will allow buyers to file a preliminary proxy statement while the tender offer is still open, but that filing a final version before the tender period closes will likely be viewed as a violation of securities law.

"This deal structure is still relatively new, and [the SEC] is getting its arms around it," one said. "The general rule seems to be 'don't push it.'"

A quirk of California law also has tripped up at least one dual-track deal. A state law requires buyers that acquire between 50 and 90 percent of target shares in a tender offer to compensate the remaining investors in stock, rather than cash — not ideal for debt-financed deals. In its acquisition of Cardiogenesis Corp., CryoLife Inc. set a tender threshold of 83.4 percent, but the SEC forced it to choose whether, if it came up short, it would extend the tender offer or buy out remaining shareholders in stock. It chose to cut off the tender early and close out with a long-form merger.

"The SEC rules are still evolving, and the tender offer rules are worded broadly," said Joseph Alley of Arnall Golden Gregory LLP, who represented CryoLife. "Sometimes you get thrown for a loop."

New deal technologies tend to make the rounds slowly, and there's a tendency to dust off language from previous deals. But attorneys said Burger King is catching on, and for the right set of circumstances — whether it be touchy lenders, quirky tax structures or the hoofbeats of competitors — it will continue to be used.

"M&A practitioners are very tuned in to new developments," Fraidin said. "It is not surprising that the Burger King structure has been replicated so frequently."

A full list of the 18 deals, identified by FactSet MergerMetrics, that have used the Burger King structure:

• Avista Capital Partners LP's $242 million acquisition of Union Drilling Inc., announced in September
• Sycamore Partners Management LLC's $369 million acquisition of Talbots Inc. in August
• Centerbridge Partners LP's $1.09 billion acquisition of P.F. Chang's China Bistro Inc. in July
• Bed Bath & Beyond Inc.'s $495 million acquisition of Cost Plus Inc. in June
• ACI Worldwide Inc.'s $525 million acquisition of S1 Corp. in February
• General Dynamics Corp.'s $387 million acquisition of Force Protection Inc. in December 2011
• Sbar's Inc. $41 million acquisition of A.C. Moore Arts & Crafts Inc. in November 2011
• TPG Capital's $1.9 billion acquisition of Immucor Inc. in August 2011
• Golden Gate Capital's $454 million acquisition of California Pizza Kitchen Inc. in July 2011
• Apax Partners Worldwide LLP's $802 million acquisition of Epicor Software Corp. in May 2011
• CryoLife Inc.'s $21 million acquisition of Cardiogenesis Corp. in May 2011
• Forest Laboratories Inc.'s $1.12 billion acquisition of Clinical Data Inc. in April 2011
• Verizon Communications Inc.'s $1.28 billion acquisition of Terremark Worldwide Inc. in April 2011
• Chesapeake Energy Corp.'s $317 million acquisition of Bronco Drilling Co. Inc. in April 2011
• Icahn Enterprises LP's $600 million takeover of Dynegy Inc., withdrawn in February 2011
• Raytheon Co.'s $509 million acquisition of Applied Signal Technology Inc. in December 2010
• Bain Capital's $1.78 billion acquisition of The Gymboree Corp. in October 201
• 3G Capital's $3.27 billion acquisition of Burger King Holdings Inc. in October 2010
  
  

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